Twitter: A Double Whammy Headed Your Way

The Lock-up expiry on May 6th can potentially increase the free float by 6 times.

The combination of the two factors could lead to further correction in Twitter’s stock price over the coming months.

Twitter’s (NYSE:TWTR) stock has been on a roller coaster ride ever since the micro-blogging platform went public five months ago. Initially defying the pundits, the stock went on a gravity defying curve, hitting a peak price of $74 on Dec 26, 2013. Gains of 184% from its IPO price and 65% above its first day closing price on the bourses, were gains any investor would take home happily. Following the initial run up in price, the stock has had a starkly contrasting movement over the last three months. The stock is down close to 36% from its December 2013 peaks, but what we believe is that the worst is yet to come with a double whammy headed your way.

The stock, in its initial days of public listing, rode a fair bit of euphoria to hit valuations more than 50 times its annual revenues, but the Q4 2013 results pointed investors to a contrasting reality: Growth at Twitter is slowing down. To make matters worse, given the nosebleed valuation multiples which Twitter currently enjoys, even a marginal slowdown can have disastrous consequences for a shareholder.

Twitter: Faltering levers of growth

Twitter’s revenue growth is largely dependent on growth in its user base and growth in engagement rate. Let’s look, in greater detail, at what is happening with respect to each of these.

Our earlier review of Twitter’s Q4 2013 results highlighted the problem of slowing growth in Twitter’s user base. The slowdown in user base growth was one of the prime reasons which led to a change in investor sentiment towards the TWTR ticker.

The growth in Twitter’s user base is clearly on a decline, a fact which has not gone down well with investors. Adding to the concern is the fall in number of absolute MAU (Monthly active users) added per quarter. The problem of Twitter’s slowing user base growth will be hard to overcome considering the fact that Twitter is facing an increasing problem of quitters, as reported in a post on thewire.com.

Let’s now look at the user engagement on Twitter, which is very important for the long term success of the platform. A timeline view, as defined by Twitter, is an accurate measure of the user engagement level on the micro-blogging platform. The chart below displays the number of timeline views on Twitter over the last 8 quarters.

The fall in number of timeline views in Q4 2013 was the first fall in the last eight quarters. The foregone conclusion: users spent lesser time on Twitter in Q4 2013. It will be interesting to see if this was a one-off instance or will it evolve into a trend like the trend currently underway in the user base growth.

The two problems of falling user base and decreasing user engagement question the basic ability of the Twitter platform to sustain the current topline growth. Well these aren’t the only problems we see ahead of a Twitter shareholder.

The lock-up expiry: A huge and dangerous wave

Twitter shareholder should also be concerned about the upcoming lock-up expiry, a wave which could fundamentally change the demand-supply dynamics of Twitter’s stock. Let’s try and understand as to what exactly the lock-up expiry could mean to Twitter shareholders. A total of 80 million shares represented the total free float following Twitter’s IPO, while the other shares were in a lock-up period. Another 10 million shares were freed up on February 15, putting the total current free float at 90 million shares. At the lock-up expiry on May 6, another 474 million shares could hit the market. Even a fractional sell-off could put a downward pressure on Twitter’s stock price. The fact that the number of new shares added to the free float represents six times the current free float could in itself add tremendous amount of downside pressure to the stock. The impact of the lock-up expiry could be spread over a few months or over a few weeks, a fact which is uncertain and depends on multiple factors. However, one result is certain: Twitter stock will face tremendous pressure as investors with locked-up shares begin to cash out post the lock up expiry.

Conclusion

The slowing user base growth and fall in total timeline views question Twitter’s ability to sustain its rapid growth, a factor which can have significant negative impact on the stock price. The scale of the May 6 expiry will only add to the current downward pressure on Twitter. A combination of the two factors could result in further downward movement of the stock price and we will not be surprised to see the correction in Twitter stock price continue over the coming months.

Twitter Stock Articles & Video

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Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. The author may not be a certified/registered investment advisor, and the opinions expressed should not be treated as investment advice. Buying and selling of securities carries the risk of monetary losses. Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions. Neither Amigobulls, nor the author have any business relationship with any of the companies covered in this post.

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